Public borrowing rises to more than £13bn in May despite £1.2bn raked in from surging stamp duty

George Osborne faced a disappointing start to the financial year as public sector borrowing rose to a higher-than-expected £13.3billion in May, official figures have showed.

That headline sum is £4.6billion higher than May last year - although May 2013 was distorted by one-off revenues - and well above economists' forecasts of £9.35bn.

Stripping out one-off factors last May - £3.9bn of interest payments due on government bonds and a tax agreement between Switzerland and the UK - public borrowing was £200million, or 1.5 per cent, lower this year.

Public finances: Borrowing was £1billion higher year-on-year for the months of April and May

The Treasury’s coffers, however, were
given a boost by stamp duties as they rose by 28 per cent in May to
£1.2billion, driven by higher property prices. It means the public deficit this year stands at £24.2bn, some 8.7 per cent higher than at the same time a year earlier.

The Office for National Statistics also said that underlying public sector debt was £1.2845trillion, or 76.1 per cent of gross domestic product, an increase on April when it was 75.7 per cent. In May last year the debt was £1.1924 trillion, or 74.1 per cent of GDP.

Howard Archer, chief UK and European economist at IHS Global Insight said:
‘The good news coming on the growth front of the economy is currently not being matched by equally good news on the public finances.

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‘The public finances were essentially only stable year-on-year in May after stripping out all distorting effects.

‘Following a weakened performance in April, this means that the Chancellor has suffered a disappointing start to fiscal year 2014/15.’

Osborne is aiming to cut the underlying public borrowing to £95.5billion this year from a shortfall of £107.0billion last year. However, borrowing stood at £24.2billion in the past two months - up by £1.9billion from £22.3billion in the same months last year.

Even if the effects of Swiss tax agreement are stripped out, borrowing is still £1billion higher year-on-year for the months of April and May.

David Kern, chief Economist at the British Chambers of Commerce (BCC) said: 'It is disappointing that for the second month in a row underlying net borrowing was higher than the previous year.

‘If this continues, the reduction in borrowing that the Office of Budget Responsibility predicted in March will become a real challenge.’

Sumita Shah, public sector regulatory policy manager at accountants association ICAEW said: ‘The latest figures show that rectifying our public finances remains an arduous task. Despite a fall in borrowing, public sector debt is now 76 per cent of GDP.

Rising prices: Homebuyers paid nearly £1billion more in stamp duty last year as house prices rocketed

‘It is clear that there needs to be a tighter grip and a proper balance sheet analysis of the public finances. If the government is to meet this challenge, then structural changes need to take place.’

Central government receipts on an underlying basis - excluding the Swiss tax arrangement and QE - were ahead by £1.4billion.

Taxes on income and wealth edged ahead just 0.4 per cent on last year to £11.9billion while corporation tax rose by 17.5 per cent to £1.5billion.

A separate stamp duty report by Lloyds published today lays bare the crippling impact of what has been labelled ‘a strong contender for the UK’s worst-designed tax’. A typical family will spend £12,000 on the tax over their lifetime, rising to nearly £40,000 for those living in the capital.

Households are being forced to pay more and more in stamp duty because house prices are rising so rapidly, currently increasing by around £220 a day.

Over the last year, the Lloyds report estimates homebuyers in England and Wales spent an extraordinary £5.6billion on stamp duty. Twenty years ago, they were paying £255million a year.

Lloyds said the Government’s failure to increase the levels at which the tax is charged has been a money-making trick.

Until 1997, it was charged at 1 per cent on all homes sold for £60,000 or more.
Today it is charged at 1 per cent on properties costing between £125,000 and £250,000, 3 per cent up to £500,000 with rates rising to a maximum of 7 per cent on homes over £2million.

Meanwhile, the ONS figures showed that Whitehall current spending rose slightly to £51.7billion, though comparisons can be skewed by changes in the way local authorities are funded.

Net social benefit pay-outs were 0.8 per cent lower at £16.3billion.

Challenge: Economists said the Chancellor's borrowing target for the fiscal year as a whole may prove to be a challenge given the rise in public borrowing during April and May

Martin Beck, senior economic adviser to the EY Item Club, said: 'Even the underlying picture points to the public finances improving at a rate well short of the recovery in the economy.

'It could be that recent reforms to the tax system, including rises in the tax-free personal allowance and cuts in corporation tax, combined with structural shifts in the labour market towards lower paid work, are contributing towards economic growth that is simply less "tax-rich" than in the past.

'If true, achieving the OBR's borrowing target for the fiscal year as a whole may well prove to be a challenge.'

Samuel Tombs, of consultancy Capital Economics, said the figures ‘contain tentative signs that the Coalition may be beginning to struggle to bring down the deficit in line with the fiscal plans’.

He said that, although underlying borrowing was lower, the reduction was much less than the margin for the current fiscal year pencilled in by the independent Office for Budget Responsibility (OBR). Tax receipts had ‘continued to grow disappointingly weakly’, he added.

‘So, while the economic recovery may now be fairly strong, it still appears to be struggling to have much of an impact on the borrowing numbers.’

A Treasury spokesman said: ‘Today's public sector net borrowing figures continue to be in line with the budget forecast, which predicts the deficit to have halved by the end of this year.

‘But the job is not yet done, which is why we must continue to work through the plan that is building a resilient economy.’